Lesson 01

Introduction to
Auditing
University of Colombo - Faculty of Management & Finance
Bachelor of Business Administration 2023
Semester V
BBA 3304 – Auditing
By: P. I. S. Jayathilaka
Assurance Engagements and Audits

 Assurance Engagement: An engagement in which a practitioner expresses a

conclusion designed to enhance the degree of confidence of the intended users
other than the responsible party about the outcome of the evaluation or
measurement of a subject matter against criteria.
 An audit is an assurance engagement in which an independent auditor
expresses an opinion over the truth and fairness of a company's financial
statements.
 Importance of auditing:
 Give confidence that the information is reasonably accurate and has been
properly prepared and presented.
 Review of that information is carried out by a practitioner who was not
involved in its preparation- provides independent and impartial conclusions.
Stakeholders of an Organization

 Various parties interested in the accounts of a company

 Directors
 Shareholders
 Creditors
 Employees
 .
 .
Accountability and Stewardship

 Accountability: Quality or state of being accountable, that is, being required

or expected to justify actions and decisions. It suggests an obligation or
willingness to accept responsibility for one's actions.
 Directors are accountable to shareholders.

 Stewardship: Duties and obligations of a person who manages another

person's property.
 Directors act as stewards of the shareholders' investments
Types of Assurance

 Absolute Assurance- 100% assurance.

 Reasonable Assurance- High level of assurance
 Limited Assurance- Lower level of assurance
 No Assurance
 Reasonable assurance engagement is a reduction in assurance engagement risk to an
acceptably low level in the circumstances of the engagement as the basis for a positive form of
expression of the practitioner's conclusion.
 E.g. Financial statements give a true and fair view

 Limited assurance engagement is a reduction in assurance engagement risk to a level that is

acceptable in the circumstances of the engagement, but where that risk is greater than for a
reasonable assurance engagement, as the basis for a negative form of expression of the
practitioner's conclusion.
 E.g. Nothing has come to our attention which cause us to believe that financial statements do
not give a true and fair view.
Types of Assurance Engagements

Engagemen Type of Form of Example

t assurance conclusion
External Reasonable Positive Year end
audit statutory
audit
Review Limited Negative Review of
quarterly
financial
statements
The objective of an external audit

 To obtain reasonable assurance about whether the financial statements as a

whole are free from material misstatement, whether due to fraud or error,
thereby enabling the auditor to express an opinion on whether the financial
statements are prepared, in all material respects, in accordance with an
applicable financial reporting framework.
 To report to the shareholders on the financial statements, and communicate
as required by the SLAuSs, in accordance with the auditor's findings.
 By-product: Advice to directors on internal control weaknesses
Audit Limitations
Auditors can never certify that the accounts are correct in all respects. They can only express an
opinion based on the judgement and work performed.
 Auditing is not objective: Judgements have to be made in forming audit opinion, risk assessment
and designing procedures.
 Sample testing
 Internal control limitations: limitations in accounting systems, human errors, collusion in fraud
 Historical reporting
 Inherent limitations in audit report format- readers may not understand
 Use of accounting estimates
Materiality
 Materiality is an expression of the relative significance or importance of a particular matter in
the context of the financial statements as a whole.
 A matter is material if its omission or misstatement would reasonably influence the economic
decisions of users, taken on the basis of the financial statements.
 Materiality depends on the size of the item or error judged in the particular circumstances of its
omission or misstatement.
Regulation of Auditors in Sri Lanka

 Sri Lanka Accounting and Auditing Standards Act, No 15 of 1995

 Sri Lanka Auditing Standards (SLAuSs)
 Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka)
 Sri Lanka Accounting & Auditing Standards Monitoring Board (SLAASMB)-
Monitoring of compliance with SLASs and SLAuSs by Specified Business
Enterprises (SBEs)
Specified Business Enterprises (SBEs)

 Companies licensed under the Banking Act, No. 30 of 1988

 Companies authorised, under the Control of Insurance Act, No. 25 of 1962, to
carry on insurance business
 Companies carrying on leasing business
 Factoring companies
 Companies registered under the Finance Companies Act, No. 78 of 1988
 Companies licensed under the Securities and Exchange Commission Act, No.
36 of 1987, to operate unit trust
 Fund Management Companies
Specified Business Enterprises (SBEs)
(contd..)
 Companies licensed under the Securities and Exchange Commission Act, No.36
of 1987, to carry on business as stockbrokers or stock dealers
 Companies licensed under the Securities and Exchange Commission Act, No.
36 of 1987, to operate a Stock Exchange
 Companies listed in a Stock Exchange licensed under the Securities and
Exchange Commission Act, No.36 of 1987
 Other companies which:
 Have a turnover in excess of Rupees 500 Million;
Specified Business Enterprises (SBEs)
(contd..)
 At the end of the previous financial year, had shareholder equity in excess of
Rupees 100 Million;
 At the end of the previous financial year, had gross assets in excess of Rupees
300 Million;
 At the end of the previous year had liabilities to banks and other financial
institutions in excess of Rupees 100 Million;
 Have a staff in excess of 1000 employees.
Sri Lanka Auditing Standards (SLAuSs)

 The most recently published set of SLAuSs are applicable for audits of
financial statements.

 Activity 1:
List down the SLAuSs based on www.casrilanka.com

 Additional reading:
Sri Lanka Framework for Assurance Engagement